Mortgage Application: The Impact of the Property's Appraisal Valuation

When you find the property you want to purchase, the lender will require the property to be appraised. Appraisers are independent contractors who must follow rules and regulations, and sometimes, the lender may allow you to choose your own appraiser. The appraisal of the property will dictate the amount of money the lender is willing to lend out you. The lender is required to give you a free copy of the propertys appraisal if you ask for it (1).

Sometimes, the selling value of a property is dramatically different than the appraised value, and this may confuse the borrower. So it is paramount borrowers understand selling value is different from market value.(2)

Generally, sellers want as much money as they can get, or at least, as much money as they have invested for their property. But market value rules, and this is determined by recent transactions within the propertys local market, for a given lookback period. It is the job of the appraiser to determine this value. Given that the property will secure the mortgage, it is the lenders interest to ensure it limits the loan amount to no more than the market value. If the borrower were to default on the mortgage, the lender would take ownership of the house, and sell it in hopes of recuperating at least the market value when it was initially financed. This why the appraisal of the property will determine the maximum amount a creditor is willing to lend.

The appraiser will look for 3 similar transactions within the lookback period I mentioned above. This period is dictated by the loan program you apply for. For example, if you apply for an FHA loan, the appraiser will adhere to the FHAs property appraisal rules; which right now limit the lookback period to 12 months. But when there are no similar transactions within the propertys local market, the appraiser will mashup recent transactions to estimate a market value for the unique property. The appraiser will have to justify his estimate by explaining how he/she came up with the number

In rural towns, or suburbs with scattered properties, the appraiser may need to review larger areas to find previous similar transactions.

The type of property you want to finance has a great impact in the appraisals valuation. These are some examples of of property types that require an appraisal methodology different than the single family home:

If you are trying to finance multifamily homes and condominiums, the lender will take into account the performance of the management association; the ratio of owner-occupied units to rented units; and in some cases the type of construction type.

If you are trying to finance an investment property, the appraisal will take into account the current and the potential income from the rental units. Part of the lenders appraisal may include your ability to manage real estate.

If you are trying to finance a new construction, the lender will appraise your property dramatically differently. Properties under construction are candidates for construction loans, and in these cases, lenders will take into consideration the developers credentials, references, construction schedule, property ownership, and the projects plans and specifications.

Aside from helping a lender establish the market value, the appraisal of your property also benefits you. By knowing the starting value of the property you buy, you can track the increase in value, and evaluate the potential impact of investing in improvements.